Wednesday, December 28, 2016

Demonetization and Impact on Food Service Industry

I have been asked this question a lot recently. I have read some references, which point that the move has been negative for the sector. However, this is a part narrative of what is happening to the sector on account of this move. I, therefore thought of sharing my perspective on the issue.

Food Service is nearly ~$100 Bn industry with majority being unorganized and non-chain. Chained which would include cafes, QSRs, Fine dining etc. would be ~5% of this but growing at 15%+ CAGR. Therefore, unorganized (hawkers, standalone shops, dhabas, street stalls) players make up the bulk share and is a section not driven necessarily by processes and standards. The impact of the recent demonetization needs to be understood with this context in mind.

Chain players to benefit in the interim: Pre demonetization, the cash to plastic ratio for chain players was on an average 35:65. However this has flipped to upward of 70% in favor of plastic. Eating out is a discretionary but an important recreational need state. Even more so, as you go down the lower pop strata towns and where cash is more dominant. Demonetization curtailed eating out in the initial few weeks especially as old notes were not accepted in Food Service Sector. However, as consumption starts getting back to normal, there is going to be shift of transactions from small mom and pop stores not equipped from a POS or Credit Card standpoint or who do not want to incur additional cost per transaction (payment gateways) to the ones who do. This should ideally benefit chain players in the interim. My estimate is, this should yield atleast a 10%+ upside in the interim for the bigger players. The sections of the chain economy where the benefit might be little muted will be fine dining and Pubs where card transactions were already 50% upward and frequency of consumption on account of high ticket is lower. What will have to be seen, is the steady state cash use and related consumer behavior in the sector in the coming months.

Sales numbers starting to add up: Pilferage in terms of sale not being registered into the book when transactions happen in cash is rampant in restaurants. This happens many times by design in smaller players. In case of chain players, this is a major control issue and is a direct sales loss to the companies. There are multiple ways which have been employed by companies but none which are full proof. The natural push given to digital payments has short circuited this positively for the companies as it takes the control out of the executive who earlier handled higher volumes of cash. My estimate is that this itself should lead to another 5 – 10% upside in the sales realization of chains. Infact, players should incentivize customers to pay through digital media to further unlock the benefit of lesser fake sales.

Delivery landscape to evolve drastically: Food aggregators, Cloud kitchens and major independent players would have been hit in the initial 2 weeks of sales. This would purely be on account of COD and lack of card machines out there. Players are trying few innovative ways with support from wallets etc. to cut through these challenges which would lead to non-adopters of digital getting converted and increasing frequency of current users. This will lead to overall increase in aggregate sales with much higher penetration of online for players who have existing online (self or aggregator) infrastructure. The ones who deliver but are not integrated on food aggregators or who are there but do not have payment gateways sorted are already on the move as they have severely been impacted. Evolution of smaller players will take time and should benefit aggregators in terms of rush of players wanting to be on their platforms and integrated aptly.

Unmasking of real business models: Pre monetization, book realization of sales made by smaller players could be far lower than real. This would allow evasion of taxes and revenue share models which support the P&L. Minimum wages also as a concept does not work in the unorganized space for lack of tracking and enforcement. On the purchasing side, lack of invoicing enables saving of VAT other taxes reducing the overall cost of purchase. The entire influx and growth of such players has also resulted in rising real estate prices and personnel costs. In terms of the chain players especially the major ones, both the sales and input costs were majorly transparent. The real costs put pressure on running profitable operations. The move to digitize payments and ensuing GST should help a level field for big players to compete effectively. Digital inflow and outflow will help unmask the real business models of smaller players and should help enforce rules. I think, this will also result in smaller players to increase their food pricing which could also affect overall consumption.

It will be interesting to see what will be the stable state utilization of digital payments and ongoing consumer behavior once cash gets into normal circulation hopefully post 31st Dec. Having said that jugaad methods are already in play and use by vendors, small players and employees to undo impacts highlighted above. I will personally be watching the space closely.

* The views, estimates and opinions expressed in this post are completely personal and not those of my employer. Further it does not represent any plans or strategies of my employer.